Corporations Amendment (Phoenixing and Other Measures) Act 2012

Posted on: 6 Jun, 2012 |
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Introduction

The federal government announced measures as part of its 2011
Budget to counter and deter what it deemed 'fraudulent phoenix
activities'. These activities relate to directors intentionally
accumulating debts with creditors and at a later point,
transferring the company's assets and business, often at less than
market value, to a related entity. The 'old' company is then
liquidated by the directors and by the time a liquidator is
appointed, there are no assets left to pay debts. The most common
debts avoided relate to tax and superannuation entitlements. By
creating a new company, the same business continues free from the
existing debt burden to statutory authorities. The ATO estimates
that approximately 6000 companies in Australia have gone through a
phoenix process.

Specifically, the amendments contained in the Corporations
Amendment (Phoenixing and Other Measures) Act 2012 (Cth)
(Act) are aimed at assisting employees of
companies abandoned by their directors to receive payments from the
government funded General Employee Entitlements and Redundancy
Scheme (GEERS) more expeditiously. This is because
a precondition for any payment to employees of a failed company
under GEERS is that the company has been formally placed into
liquidation. Where the company has limited or no assets, and has
effectively been abandoned by its directors, creditors may have no
incentive to fund the winding up of the company. The Act
facilitates the process of liquidation by enabling ASIC to order
the winding up of a company itself.

Substantive amendments

provide ASIC with an administrative power to order the winding
up of a company to facilitate payment of employee entitlements
where a company has been abandoned;

impose a notification requirement on insolvency practitioners
in relation to paid parental leave payments; and

include a regulation making power to prescribe methods of
publication of notices relating to events before, during and after
the external administration of the company.

Winding up by ASIC

The Act provides ASIC with a discretionary power to place a
company into liquidation where:

response to a return of particulars given to a company is at
least 6 months late and the company has not lodged any documents
required under the Corporations Act in the last 18 months and ASIC
has reason to believe that the company is not carrying on business
and believes the order is in the public interest (subs
489EA(1));

the company has not paid its annual review fee within one year
of the fee being due (subs 489EA(2));

ASIC has reinstated the registration of a deregistered company
in the last six months, and has reason to believe that making the
order is in the public interest (subs 489EA(3)); or

ASIC has reason to believe that the company is no longer
carrying on business and has given to the company and each of its
directors at least 20 business days' notice of its intention to
make the order and there is no objection (subs 489EA(4)).

Previously, the Corporations Act provided that creditors and
ASIC could apply to the court for an order to wind up a company.
Before the amendments ASIC did not have the power to order the
winding up of a company itself. In exercising its powers under new
subsection 489EA(1), ASIC will not be acting in the same way,
by the same process, or on the same grounds as does a court in
ordering the winding up of a company. ASIC will be able to take
into account policy considerations, including the ability for
employees to access GEERS, or possible phoenixing behaviour by the
directors of the company.

Section 489EB operates so that when ASIC exercises its powers to
wind up a company, the company is deemed to have passed a special
resolution under existing section 491 of the Corporations Act that
the company be wound up voluntarily.

Under section 489EC, if ASIC orders that a company be wound up,
it may also appoint a liquidator and determine the liquidator's
fees where it makes such an appointment. This may provide an
additional mechanism when addressing possible phoenix company
behaviour by facilitating the investigation of alleged misconduct
and uncommercial transactions entered into prior to
deregistration.

Publication requirements

The Corporations Act currently requires petitioning creditors
and liquidators to publish notices of certain events in the print
media or the ASIC Gazette, often at a significant cost. The Act
amends the Corporations Act to allow for publication of notices by
other means. The Explanatory Memorandum clarifies that this will be
through publication on a single corporate insolvency notices
website to be maintained by ASIC. ASIC will charge a prescribed fee
for publication. It is expected that the website will be
operational from 1 July 2012.

Paid parental leave

Through section 600AA, the Act now imposes an obligation on
external administrators to advise the Secretary of the Department
of Families, Housing, Community Services and Indigenous Affairs
(FAHCSIA) where a company to which they are
appointed is a paid parental leave employer. As the department
responsible for administering the Paid Parental Leave Scheme, the
changes allow FAHCSIA to determine whether to continue paying paid
parental leave payments to the company or to make the payments
directly to the employer.

Future amendments - director penalty regime

The Tax Laws Amendment (2011 Measures No 8) Bill
introduced into parliament in October 2011 has been put on hold
following a number of concerns raised during public consultation.
The proposed legislation aims to extend the director penalty notice
(DPN) regime to make directors personally liable
for their company's failure to meet employee superannuation
entitlements. The predominant concern raised related to whether the
proposed changes would prejudice innocent company directors who do
not deliberately cheat the system.

In its current form the Bill would allow the ATO to pursue
directors personally without issuing a DPN if the company's unpaid
PAYG withholding or superannuation guarantee liability remains
unpaid and unreported for three months after the due date. This
represents a significant change because it will impose a personal
liability on a director even if they have not been served with a
notice requesting payment. The proposed legislation also denies
directors and their associates their entitlement to PAYG
withholding credits where the company has failed to remit PAYG
withholding amounts to the ATO. The government has indicated that
it expects to introduce the new Bill before August 2012.